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Rio, BHP, Fortescue plan to spend billions to expand iron ore mines

October 12, 2017

Rio, BHP, Fortescue plan to spend billions to expand iron ore mines

Australia's biggest iron ore producers are spending as much as $US10 billion ($12.5 billion) on mines so they can keep pumping out shipments to China as demand from their biggest customer shows little sign of easing.

Led by Rio Tinto, the nation's top three exporters plan to add about 170 million tonnes of new capacity to replace exhausted mines, and are studying investments in infrastructure and equipment to boost export capacity to their long-term targeted rates.

Output will rise 9 per cent to 843 million tonnes in 2022, according to Deutsche Bank estimates.

Forecasts of a slowdown in China's steel industry are proving to be misplaced with BHP Billiton saying production hasn't yet peaked and likely won't do so until the middle of next decade, while steel-making raw materials will continue performing well over the coming 12 months.

Iron ore prices are trading near a four-month high.

Rio's chief executive officer Jean-Sebastien Jacques on Wednesday opened the producer's $US338 million Silvergrass mine, the first of a wave of replacement operations in WA's Pilbara region.

Australia will account for about 56 per cent of the global export market by 2019, from 54 per cent last year, according to government forecasts.

Rio, the world's second-largest iron ore exporter after Brazil's Vale, has approved a $US100 million of spending on replacements for depleted operations, and will consider approval for a further $US1 billion across the next three years, according to a presentation it gave earlier this month.

The producer is also studying $US4.4 billion of potential development and maintenance spending, the filing said.

BHP will seek approval next year to spend as much as about $US3.2 billion to develop its South Flank mine in the Pilbara to replace 80 million tonnes of annual output. It will also spend about $US300 million on work to boost annual capacity in Australia to 290 million tonnes, Deutsche Bank estimated in a July note.

Despite the new wave in investments, new spending by the top miners remains a fraction of the amount deployed at the peak of China's demand boom.

Rio invested $28 billion between 2009 and 2016 to expand its Pilbara mines and infrastructure, according to a June submission to an Australian government commission on productivity.

Having reported a jump in profit this month, BHP chief executive Andrew Mackenzie said the miner is more optimistic about China's efforts to reform the economy, which are aiding demand.

Iron ore has rallied since mid-June on rising Chinese imports and as major producers added to mine supply at a slower rate than anticipated.

"We're investing in future production by putting replacement mines in place well ahead of when we need them, and maintaining about 20 years of production inventory," Fortescue Metals Group CEO Nev Power said last week. The company expects to spend as much as $US1.5 billion on a replacement for its outgoing Firetail operation.

Producers may add about 100 million tonnes to the seaborne market in 2017 and 2018, weighted to next year, Chris Salisbury, Rio's iron ore chief executive, has said. Steel demand in China has proven stronger than mills and traders expected, with a rebound in machinery sales and growth in the auto sector, according to a presentation he gave earlier this month.

Steel production has expanded to a record this year, and overseas ore purchases are on course to comfortably exceed 1 billion tonnes. Strong demand saw spot ore with 62 per cent content in Qingdao last week touch $US79.93 a tonne, the highest since April, according to Metal Bulletin. It was at $US76.36 on Tuesday.

Article originally published in the Sydney Morning Herald on August 30, 2017

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